Capital Maintenance

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January 22, 2017 at 2:53 am #368818
Anuja Nair
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Question) Ross Ltd made a profit of $350 000 for 20X9 based on historical cost accounting principles. Specific price indices increase during the year by 20% and general price indices by 5%.

How much profit should Ross Ltd record for 20X9 under three different capital maintenance concept : money financial capital maintenance, real financial capital maintenance, physical capital maintenance?

For the money financial capital maintenance i understand the answer is $350 000. But i don’t know how to work out the financial or physical capital maintenance since neither the opening capital nor the closing capital is given.

The answer key :
Money financial capital maintenance $350 000
Real financial capital maintenance
$332 500
Physical capital maintenance
$280 000
January 23, 2017 at 5:42 pm #369072
MikeLittle
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$350,000 achieved after a 20% price increase means that, without that increase, the profit would only have been $280,000 ie $350,000 represents 100%. What would be the equivalent figure without that 20%?

$280,000

Similar thinking behind the real financial maintenance concept – if $350,000 is 100% after a 5% increase what value would 95% be?

$332,500

These theoretical nonsense concepts play only a very TINY role in F7 – much easier marks to look for and those topics will be almost guaranteed to appear in every F7 exam!
January 24, 2017 at 3:30 am #369140
Anuja Nair
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Got it! Thank you sir !
January 24, 2017 at 8:46 am #369199
MikeLittle
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You’re welcome
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